Hello. My name is Kyle Krasa and I’m an estate planning attorney in Pacific Grove, California. I’m certified by the state bar of California, as a legal specialist in estate planning trust and probate law. The purpose of this video is to give you general information about an important aspect of estate planning law so that you can be prepared when working with your own attorney. Watching this video does not establish an attorney client relationship. The law is far more complex and nuanced than can be explained in a few short minutes. As a result, before acting on any of the information contained in this video, you should consult a competent attorney who is licensed to practice law in your community. With that understanding, I hope you enjoy my video and you find it informative. Thank you.
For married couples, there are essentially two ways that they can structure their trusts upon the death of the first spouse and we’re going to call this option one on the left and option two on the right. Now both of these options are the same while both spouses are living. The difference is what happens upon the death of the first spouse while both spouses are living in both options. Typically in a community property state like California, a married couple will have one joint trust together. That joint trust will be revocable, meaning that they can change it anytime they want. Nothing is set in stone, they can change a paragraph, they can change a section or they can eliminate the trust altogether. Secondly, there are no separate tax returns for the trust. All the taxes get paid on the couple’s individual 1040 and the tax ID number for the trust is either spouse’s social security number.
So for both options one and two, we have a revocable trust, no separate tax returns, everything. Uh, we using that, the social security number of either spouse for option one upon the death of the first spouse. Basically, the trust will just continue on in the same manner for the benefit of the surviving spouse. We often refer to this type of trust as an “A Trust.” So the trust will remain revocable entirely by the surviving spouse. All the taxes will be filed under the surviving spouses personal return and under the surviving spouse’s social security number. So the benefit of option one is simplicity. Uh, keep things simple, make things as easy as possible, just have the trust continue on in the same way for the surviving spouse as it operated for both spouses while they were living. Now, one downside to this approach, one potential downside is that flexibility, the surviving spouse has the power to change the trust however he or she wants.
And that means the surviving spouse can change the ultimate beneficiaries and can eliminate the beneficiaries that the deceased spouse had expected and had agreed upon. So the surviving spouse has the power with option one here with the “A Trust” to completely frustrate the intent of the deceased spouse. I’ll make some room here. And option two, again, is the same. While both spouses are living. However, when the first spouse passes away, things are a little different. The trust divides into two share, an A Trust and a B Trust, so we call this an A/B Trust. The A Trust is the surviving spouse’s share and the B Trust is the deceased spouse’s share. The surviving spouse will be able to use both shares during his or her lifetime. The A Trust is just going to be like all of these other trusts is going to be revocable under the 1040 of the surviving spouse and under the social security number.
However, the B Trust is going to be different and I’m going to make some room here. The B Trust is going to be, first of all, it’s going to be an irrevocable trust so the surviving spouse is not going to be able to change it or I could put a little star here. Sometimes we can give the surviving spouse limited authority to change the trust, but still they’re not going to have complete free reign over changing the trust. The B Trust is going to require its own set of tax return. So a 1041 and it’s going to require its own tax ID number. So there’s going to be more administration as it relates to the B Trust. Now why would you do, um, an A/B Trust? Well, there are really three main reasons to do an A/B Trust and I’m going to list these reasons here, just making some room.
Um, one is the traditional approach and that is for estate tax planning. Estate tax is a tax on inheritance and it is only subject to certain estates. There is something called an estate tax exemption. If you add up the fair market value of all of your assets upon death, if it is equal to or less than the estate tax exemption in the year of your death and you don’t have any estate tax at all, only if the total value of your estate upon your death is over the estate tax exemption in the year of your death, will there be a problem? And the traditional approach to the A/B Trust was to combine both spouse’s estate tax exemption. The exemption used to be a lot lower than it is today and that was a bigger concern. With the current modern estate tax law with the exemption.
So big an A/B Trust is not necessary for most people to plan for the estate tax. A second reason might be control. If there’s interest in trying to control the surviving spouse, like we say, well, you know, I want my surviving spouse to enjoy both shares of the estate. I want my surviving spouse to enjoy my share of the estate, but when the surviving spouse dies, I want to make sure that my share goes to my beneficiaries and I don’t want my surviving spouse to have complete control to change those, an A/B Trust might make sense in that situation. An A/B Trust is very popular with blended families when there are children, separate children from one or both spouses, an A/B Trust is often something to consider. A third reason might be asset protection. There is a way to build in a degree of asset protection for the surviving spouse in the B trust.
That’s not available otherwise. So that could be another reason to do the A/B Trust. Now, a lot of older trusts are designed as A/B Trusts and they’re designed primarily for the estate tax reasons. The way that those A/B Trusts were structured in the past when we were only concerned about estate tax is different than how you might typically structure the A/B Trust today. So even if you like the A/B structure and you have an older trust, you might want to take a second look at it because the way this A/B Trust is structured could be updated to provide for some more flexible tax planning while still giving the control and the asset protection that this structure features. So to sum it up, married couples have these two choices. They can structure the trust as an A Trust or as an A/B Trust. And sometimes the A Trust where you’re giving complete control to the surviving spouse over the assets.
Sometimes that is referred to, and let me get my marker here. Sometimes it’s referred to as an “I love you trust.” In other words, you can do whatever you want. Honey, I love you. I trust you. I know you’re going to make a decision. I’m going to give you complete control and freedom over the trust. The A/B Trust is often referred to as an, “I love you, comma, but Trust.” I love you, honey. I want you to enjoy the assets. I want you to enjoy my share, but I want to make sure that whatever’s left over after you pass away goes to my beneficiaries in accordance with my wishes. And I don’t want to give you the power to change it. So this is a key decision that a married couple is going to have to make together. How do you want to structure your trust? Do you want to structure it as an A Trust where you prioritize simplicity and flexibility? Or do you want to structure it as an A/B Trust to give a degree of control over the deceased spouse’s assets and maybe build in some asset protection and perhaps some estate tax protection.
I hope you enjoyed watching my video. As I mentioned at the beginning, this is not intended to be a substitute for proper legal counsel. Before acting on any of the information contained in this video, you should consult a competent attorney who is licensed to practice law in your community. Thank you.